Public Contract

PUBLIC CONTRACT

An agreement to perform a particular task to benefit the community at large that is financed by government funds.

Federal, state, and local governments enter into contracts to purchase goods and services. The construction of public buildings, highways, bridges, and other structures is governed by a well-defined contractual process of competitive bidding that seeks to protect the public against the squandering of public funds and prevent abuses such as fraud, favoritism, and extravagance.

A public contract is a legally enforceable commitment of a party to undertake the work or improvement desired by a public authority. Public contracts are largely governed by the general law of contracts. Private individuals and corporations are held to stricter standards in their dealings with the government than in their private dealings. Conversely the government must deal fairly with those who contract with it. It can enter contracts within the limitations imposed by constitutional and statutory provisions. In addition, federal laws must be observed because most public projects receive financial aid from the federal government.

Awarding Contracts

The method by which contracts are awarded is ordinarily regulated by statute or constitutional provision, and the prescribed method must be followed. For significant expenditures of public funds, government bodies usually must use a bidding process. In the awarding or letting of public contracts, the public body invites bids or makes "requests for proposals" so that it can award the contract to the bidder who qualifies under the terms of the governing statute. The submission of a bid in response to an invitation is considered an offer, and although it may not be freely withdrawn prior to acceptance, it does not become a contract unless and until such time as it is accepted by the proper public authority. A bid that does not respond to the terms contained in the invitation to bid is not within statutory requirements but is considered to be a new proposition or a counterproposal.

Competitive Bidding

For major government expenditures, such as construction of public buildings and highways, government bodies require competitive bidding, which is a well-defined public process of letting a contract. Competitive bidding is a means of preventing political graft and corruption because the public nature of the process discourages favoritism and fraud. The integrity of the process is a central goal of competitive bidding. If a public official or employee is later found to have had an interest in a public contract, the agreement is void and unenforceable, and the interested parties may be subject to criminal prosecution.

To provide bidders with an opportunity to bid competitively on the same work, the appropriate public authorities must adopt plans and specifications that definitely set the extent and type of the work to be done and the materials to be furnished. The public entity itself must prepare these plans and specifications, and it must provide all prospective bidders with the same specifications from which to prepare their bids. The specifications must not be drafted so as to restrict bidding to a single bidder unless it is clearly essential to the public interest to do so.

The plans and specifications cannot be changed once an invitation for bids or the bids themselves have been made unless all bidders are notified so that they have an opportunity to bid under new conditions. In making specifications, the public authority has wide discretion concerning the particular equipment or product that it might require as part of the contract. For example, it might designate a specific product covered by a patent held or manufactured only by one bidder.

Once the plans and specifications are prepared, the public entity must publish a public notice of its intentions to receive bids. This notice does not constitute an offer but is merely a solicitation of offers. An invitation to bid should indicate the deadline for bids to be submitted. It must be explicit in order to facilitate intelligent bidding.

Certain conditions are required of bidders. There might be a requirement that bids be properly signed and accompanied by a financial statement of the bidder. Customary additional requirements are a certificate attesting that the bidder has not colluded with others in the sub-mission of the bid, and a bond or other security, which is conditioned on the making of a contract and the performance of work according to the contract.

A contractor's bond requires the contractor to pay a certain amount of money to the public authority if the obligations in the bond are not fulfilled. The bond contains two obligations: one for the faithful performance of the contract and the other for the protection of the right of laborers and material handlers to be paid.

A bid for the construction of public works must be in substantial and material conformity to the details contained in the bid specifications. All matters concerning the substance of the competitive bid, such as those that might affect price, quantity, quality, or manner of performance, must conform to the details indicated in the specifications. Failure to substantially comply will result in rejection of the bid, and a contract entered into based on such a bid is invalid.

A bid may be accepted if it contains minor or immaterial deviations from the specifications. Whether a deviation is material and substantial is determined by whether the bid limits fair competition by providing the deviating bidder with a substantial advantage or benefit not enjoyed by other bidders, a question of fact decided in light of all the circumstances of the case.

Once the time for filing bids expires, the bidder is bound by the bid as filed, which cannot be altered. A material defect cannot be corrected after the bids have been opened, but a minor defect can. If necessary information is missing from a bid when it is opened, it cannot be supplied then or later by a private understanding between the bidder and the public authority.

In general, an individual who files a bid cannot withdraw it. The benefits that will accrue to a bidder under the public bidding statutes are viewed as adequate consideration to make a bid irrevocable. Some statutes, however, permit a bidder to withdraw a bid at any time prior to its acceptance. Withdrawal is generally allowed if a bidder makes an honest and good faith mistake in calculation that has a material effect upon the substance of the contract. A bidder can withdraw a bid only if he was reasonably prompt in providing notice of the error to the public authority or if the public authority will not suffer substantial hardship when the bid is withdrawn.

Once the public authority opens the bids, it must review them within a reasonable period to determine if one should be accepted. A bid must be accepted for the formation of a public contract to occur. An acceptance and award of the contract to a bidder must be on the terms advertised because public policy proscribes granting to a successful bidder or her subcontractor a benefit that was not extended to others who submitted bids. A public body can be granted the right by statute, or it can reserve in the advertisement of bids the right to reject any and all bids, but it cannot do so arbitrarily or without good cause. A typical reason for rejection of all bids is that the bid amounts exceed the public funds allocated for the project.

Ordinarily the award of a public contract under a competitive bidding statute must be to the lowest bidder unless facts establish that another bid, although higher, is the lowest one made by a responsible bidder. The lowest responsible bidder is the contractor whose bid was in substantial conformity to the plans and specifications and who is able to perform the work at the lowest cost. The dollar amount of a contractor's bid is only one factor in determining the lowest responsible bidder. The government unit must also consider a bidder's experience, prior dealings with the government body, reputation for satisfactory work, and intention to employ local labor. The fact that a low bidder has demonstrated delay, lack of cooperation, or poor performance on prior contracts supports a finding that the person is not the lowest responsible bidder.

Since the 1970s public contracts let by competitive bidding have been subject to affirmative action requirements. The federal Public Works Employment Act (42 U.S.C.A. § 6701 et seq.), enacted in 1977, imposed certain conditions on public projects that receive financial assistance from the federal government. The most controversial provision prohibits any local public works project from being granted federal assistance unless at least 10 percent of its work goes to minority business enterprises. A minority business enterprise is a business in which minority group members own at least a 50 percent interest or, in the case of a publicly owned business, 51 percent of the stock is owned by minorities. When a bid is submitted, it must be accompanied by a statement that the bidder has taken steps to include the involvement of minorities in the project. The U.S. Supreme Court, in Fullilove v. Klutznick, 448 U.S. 448, 100 S. Ct. 2758, 65 L. Ed. 2d 902 (1980), upheld the constitutionality of the 10 percent requirement, holding that the set-aside provided a way for groups previously subjected to discrimination to achieve equal economic opportunity. However, in City of Richmond v. J. A. Croson Co., 488 U.S. 469, 109 S. Ct. 706, 102 L. Ed. 2d 854 (1989), the Supreme Court struck down a set-aside program for minority contractors. The Court concluded that these types of affirmative action programs can only be justified to remedy prior government discrimination instead of past societal discrimination. Thus, if it cannot be shown that a city discriminated against minorities in the past, the set-aside program is an unconstitutional preference.

Legal Challenges to Awarding of Public Contracts

A low bidder is ordinarily entitled to reasonable notice and a hearing prior to rejection of the bid unless the bidder has blatantly failed to comply with a specific contract provision, such as the minority contractor requirement. Unsuccessful bidders can start lawsuits that challenge the rejection of their bids and the awarding of a public contract to another bidder. Because public contracts are matters of public interest, taxpayers can also contest the award of a contract.

The courts ordinarily will not interfere with an action of a public official or body in accepting or rejecting bids and awarding a contract, provided that the official or organization made it fairly and honestly, in good faith, and in the interest of the public. An award that was made arbitrarily or capriciously or as result of favoritism or fraud will be subjected to judicial scrutiny. There should be a reasonable time interval between the opening of the bids and the execution of a public contract to allow a disappointed bidder to bring any complaint before a court for judicial review.

Contracts executed by public officers who do not have the authority to make contracts are void and unenforceable. A contract is void if the bidder has failed to comply with competitive bidding requirements. A contractor has the responsibility to learn whether the contract complies with the law. In general, once the courts declare a public contract void, the contractor cannot recover unpaid claims, but the government can recover any payments it made under the contract. A public entity may be obligated to pay the reasonable value of the benefits received under a void contract but only in the absence of a statutory prohibition against such arrangements.

Contractual Rights of the Parties

A public contract can be assigned by one contractor to another where the assignment is restricted to funds due under the contract. However, it is not assignable without the consent of the public body with which the contract is made. A contractor and his or her assignee are both bound by the terms of the main contract. The contractor cannot transfer by assignment anything that was not allowed under the main contract. The law can provide that no assignment is valid unless copies of the contract and the assignment are filed with the court administrator in the county where the public works project is located.

A contractor can employ subcontractors to perform certain portions of the work. For example, in the construction of a public building, a contractor will typically hire an electrical and a mechanical subcontractor, along with subcontractors who do cement work, roofing, and painting. A subcontractor enters an agreement with an original contractor to perform part of the work that the contractor has agreed to perform in the original contract.

A public authority has the inherent right to make reasonable and necessary changes or modifications in public contracts, according to a new agreement between the contracting parties. A public contract can also contain a provision governing its cancellation or termination under certain conditions. A public authority generally cannot lawfully rescind its contract without the contractor's consent, except in the case of fraud, mistake, or the invalidity of the contract.

A contractor is bound to the contract as agreed, and a failure to observe it will make the contractor liable for breach of contract. The contractor is entitled to recover for work completely or substantially performed in compliance with the contract. Where a substantial performance of a contract has taken place with the use of defective materials or faulty workmanship, the defects must be corrected if practicable. If correction is not possible or practicable, the contractor will be awarded the contract price reduced by the difference between the value of the defective work and its value if completed according to the terms of the contract.

A public contractor can be compensated for additional work that results from authorized changes in the plans and specifications, as well as for extra work or materials required because conditions differ from their representation in the plans and specifications. Oftentimes contractors realize the bulk of their profit from such "change orders."

When a contractor does not complete the job within the time specified, she or he has committed a breach of the contract. Some public contracts contain penalty clauses, which assess the contractor a certain amount of money for each day past completion. On the other hand, road and bridge contracts may contain clauses that reward a contractor for finishing the project ahead of schedule.

further readings

Drake, W. Avon, and Bert D. Holsworth. 1996. Affirmative Action and the Stalled Quest for Black Progress. Champaigne: Univ. of Illinois Press.

Hearn, Emmett E. 2002. Federal Acquisition and Contract Management. 5th ed. Los Altos, Calif.: Hearn Associates.

Keyes, W. Noel. 2000. Government Contracts in a Nutshell. 3d ed. St. Paul, Minn.: West Group.

Madsen, Marcia. 1997. "Purchasing Reforms Pique the Need for Contract Attorneys." National Law Journal (August 4).

Porterfield, Richard L. 1993. The Insider's Guide to Winning Government Contracts. Hoboken, N.J.: John Wiley & Sons.

Seyfarth, Shaw, Fairweather & Geraldson. 1999. The Government Contract Compliance Handbook. 3d ed. St. Paul, Minn.: West Group.

Whelan, John W. 2000. Federal Government Contracts: Cases and Materials. 2d ed. New York: Foundation Press.

cross-references

Fraud.